With its 2018 tax cut, Wells Fargo could pay its $1 billion fine 3 times and still have cash to spare

KAREN BLEIER / AFP/Getty Images

Federal regulators on Friday hit Wells Fargo with a $1 billion fine, the largest levied against a U.S. bank during the Trump administration. But the civil penalty is unlikely to hobble or even slow down the bank.

Federal regulators on Friday hit Wells Fargo with a $1 billion fine, the largest levied against a U.S. bank during the Trump administration. But the civil penalty is unlikely to hobble or even slow down the bank. (KAREN BLEIER / AFP/Getty Images)

Renae MerleOf The Washington Post

Federal regulators hit Wells Fargo with an eye-popping $1 billion civil penalty Friday after finding that the company failed to catch problems in its auto and mortgage businesses over several years, cost customers millions of dollars and even wrongfully repossessed their cars.

But the penalty is unlikely to strike a serious financial blow to the bank, which is expected to be among the biggest beneficiaries of the Republican administration's policies.

For years, the bank’s lax internal management led it to "engage in reckless, unsafe or unsound practices and violations of law," according to regulators.

Wells Fargo is the largest bank by deposits in the four-county region that includes Lehigh and Northampton counties. It has 41 branches and nearly $3.4 billion in deposits, or more than 20 percent of market share, according to the Federal Deposit Insurance Corp.

Wells Fargo charged thousands of customers for auto insurance they did not need, driving some to default on their loans, then improperly confiscated the vehicles, according to the settlement documents. The bank also improperly charged some customers fees to lock in an interest rate for a mortgage.

"Since at least 2011, the bank has failed to implement and maintain a compliance risk management program commensurate with the bank’s size, complexity and risk profile," one of the regulators, the Office of the Comptroller of the Currency, said in its consent order.

The widely expected settlement is among the most aggressive moves by Trump administration regulators to punish a big U.S. bank. It could also hobble Wells Fargo’s efforts to move beyond more than a year of rolling scandals that have hampered its growth and tarnished its image.

Wells Fargo, which has repeatedly apologized for its misdeeds, pledged to repay affected customers. The bank has said it would spend $182 million to repay customers who were charged for car insurance they did not need. It has not said how much it will refund customers who were improperly charged to lock in mortgage rates.

"For more than a year and a half, we have made progress on strengthening operational processes, internal controls, compliance and oversight, and delivering on our promise to review all of our practices and make things right for our customers," Timothy J. Sloan, president and chief executive of Wells Fargo, said in a statement Friday. "While we have more work to do, these orders affirm that we share the same priorities with our regulators."

The Trump administration has ushered in a period of resurgence for the banking industry. Trump has appointed business-friendly regulators and supported legislation in Congress to roll back rules that the industry has complained go too far. But Wells Fargo's running scandals have dampened those efforts, with Democrats and consumer advocates pointing to the bank's misdeeds as proof that the industry needs more oversight, not less.

The enforcement action is also the first announced by the CFPB since Mulvaney took control of the agency as acting director late last year. Democrats have criticized Mulvaney, who is also director of the White House Office of Management and Budget, for appearing to abandon the watchdog's job of punishing financial institutions and instead focusing on rolling back some of the bureau's most aggressive rules.

"Wells Fargo has a terrible track record of harming consumers and deserves every punishment they have received and more," California Rep. Maxine Waters, the ranking Democrat of the House Financial Services Committee, said in a statement.

But the civil penalty "does not mean that Mick Mulvaney, who was illegally appointed to serve as acting director, has turned over a new leaf and is now looking out for consumers."

The fine is a component of one of the largest enforcement cases in the CFPB's six-year history. The OCC's $500 million fine will be credited toward that amount, giving Wells Fargo a $1 billion bill overall.

The large fine is hardly crippling for Wells Fargo, however, which has more than $1 trillion in assets. The bank reported Friday that although the penalty drove down first-quarter profits by $800 million, it netted $4.7 billion.

Wells Fargo is expected to benefit from a massive corporate tax cut passed by Congress last year. The bank's effective tax rate this year will fall from about 33 percent to 22 percent, according to a Goldman Sachs analysis released in December. The change could boost its profits by 18 percent, according to the analysis.

Just in the first quarter, Wells Fargo's effective tax rate fell from about 28 percent to 18 percent, saving it more than $600 million. For the entire year, the tax cut is expected to boost the company's profits by $3.7 billion, according to the Goldman Sachs report.

"While the size of this fine is higher than anticipated, it is expected to be easily absorbed by quarterly earnings," Fitch Ratings said in a statement in the last week when the bank initially signaled it could face a $1 billion fine.

In an interview with Fox Business Network, Mulvaney defended the size of the penalty.

"I don't think the folks at Wells think a billion dollars is a small amount of money," he said. "I don't think anybody should think a billion dollars is a small amount of money. So this is a historically large collection, and we're very satisfied with the outcome."

The fine could further hobble the beleaguered bank's efforts to rebuild its reputation after admitting in 2016 that it had opened millions of sham accounts that customers did not want. In the wake, its longtime chief executive resigned; last month, the Federal Reserve levied an unprecedented penalty against the bank, blocking its ability to expand.

"Our customers deserve only the best from Wells Fargo, and we are committed to delivering that," Sloan said.